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Rights Based Fishing:

Evidence from the New Zealand Rock Lobster Fishery

Basil M.H. Sharp

Department of Economics

The University of Auckland

Chris J. Batstone

Economics Academic Group

Auckland University of Technology

Abstract

In the real world of fisheries management few are based on tradable rights to harvest. This paper provides evidence that supports the effectiveness of rights based management in addressing the twin ills of fisheries management, unsustainable harvest and economic inefficiency. Econometric modelling is based on two independent data sets. The first data set was obtained from annual surveys conducted over a nine-year period. These data provide an opportunity for the application of panel data techniques. The second data set was obtained from quota market information and provides a basis for times series modelling. Two panel data models point to the significance of labour, non-labour expenditures capital and the total allowable commercial catch is determining sales. Times series analysis of quota market data points to a relationship between asset price as the dependent variable, and annual lease price, allowable catch, interest rates and the export price index. Both panel data models show the significance of natural capital and manufactured capital. The role of the allowable catch in the two panel data models and the time series model highlights the import role the allowable catch plays in determining profitability, firm-level decision making, and sustainable fisheries management.

JEL Q22, C22, C23

INTRODUCTION

In the real world of fisheries management few are based on tradable rights to harvest. Economic theory suggests that rights-based fisheries should yield higher economic rents relative to other forms of governance provided, of course, that the harvest is kept within sustainable limits. This paper provides evidence that supports the effectiveness of rights based management in addressing the twin ills of fisheries management, unsustainable harvest and economic inefficiency.

The paper is structured as. The second section of this paper describes the property rights in New Zealand’s fisheries. The third section presents results of econometric analysis using two independent data sets. The first data set was obtained from annual surveys conducted over a nine-year period. These data provide an opportunity for the application of panel data techniques. The second data set was obtained from quota market information and provides a basis for times series modeling. The paper concludes with a general discussion on research findings and future research direction.

2. THE QUOTA MANAGEMENT SYSTEM

Rights-based fishing is centred on providing transferable rights to a sustainable harvest (Q). Economic efficiency requires not only transferability, but also setting an optimal harvest (Q*) and competitive markets (Arnason, 1990). In many respects New Zealand’s quota management system is similar to Arnason’s model, with two major exceptions. First the total allowable catch (TAC) is set by a fisheries management agency. Second, rights to harvest are differentiated. Only commercial rights are tradable as individual transferable quota (ITQ). With respect to ITQ, competitive markets will ensure that more efficient firms get to harvest fish. Furthermore, the market value of quota provides summary information about current and future conditions in the fishery.

Let's now consider a shared fishery. Assume that the TAC = Q* and that the present value of net benefit to two groups - commercial and non-commercial fishers - is NBC and NBNC respectively. Sutinen (1996) has shown that the TAC should be allocated in such a way that that the present value of net benefits are equalised. If the right to harvest is not differentiated, then competition will result in a uniform price P*. Commercial fishers will harvest [pic]and the non-commercial[pic]such that [pic]. Provided the TAC is set at the optimal level Q* use of the right is immaterial to achieving efficiency. In the uncertain world of fisheries management it is highly unlikely that Q* will be discovered. Provided rights to the TAC are undifferentiated competition in the quota market will ensure rights gravitate to their most highly valued use. This is not the case however in the rock lobster fishery, rights are differentiated across a number of user groups.

Rights to harvest rock lobster (Jasus edwardsii) are defined in each of the 10 quota management areas (QMAs) within New Zealand's EEZ. An annual TAC is set for each stock, based on assessments of the maximum sustainable yield (MSY). This provides a measure of the TAC by all groups including commercial, recreational and traditional users. Once the TACs have been determined, a total allowable commercial catch (TACC) is set for each QMA, taking into account non-commercial interests in the fishery and any other relevant environmental social, cultural or economic factors. Each TACC is then allocated amongst quota owners as ITQ in proportion to their ownership.

A net-benefit maximising allocation of the TAC requires a balancing of net benefits between commercial and non-commercial allocations. Arnason's (1990) proposition that ITQ prices are functionally related to profit and that quota prices can be used to inform the fisheries management process has been empirically confirmed (Batstone and Sharp forthcoming). Unfortunately the existing institutional structure does not generate data on the value of fishing to non-commercial groups outside the QMS. This asymmetry makes it extremely difficult to allocate the TAC using a net-benefit maximising criterion.

Quota rights are held in perpetuity, they are transferable, and can be transformed into derivative rights such as a lease. Quota rights are property and are used as security by creditors. Initially quota rights were defined as a right to a tonnage in perpetuity. The original adjustment mechanism had government entering the market as a seller of rights if stock assessments warranted increasing the commercial harvest, as a buyer if the commercial harvest exceeded that considered sustainable. A review of fisheries legislation concluded that this mechanism created incentives to fully harvest the TACC because government would provide compensation - through its buying activities in the quota market - for any reduction (Ministry of Fisheries 1992). In 1990 legislation redefined quota rights as a percentage of the TACC. The change to proportional ITQ shifts the distribution of stock adjustment risk from government to industry.

Any changes to the TACC are pro-rated across ITQ owners. For TACC increases, existing ITQ owners enjoy the benefits of extra harvest at no cost. For TACC decreases, existing ITQ owners suffered reduced harvest with no compensation. In order to gain support for the change to proportional ITQ rights an "Accord" was negotiated between government and industry to provide compensation payments over a transition period to 1994. During this period resource rentals, were set aside to compensate quota owners for TACC reductions.

Where catches are taken in excess of quota holdings, the permit holder may purchase further quota, lease further quota or land catches against another firm's quota holdings. Quota owners have additional flexibility to balance catches against quota holdings. In any year owners can carry forward uncaught quota to the next year, provided it is not more than 10% of their holdings for that fish stock. Conversely they may take catches up to 10% more than their quota holdings, the additional amount of catch being deducted from their subsequent years catch entitlement.

The ability to accurately monitor catch levels and balance these against quota holdings is critical to the success of the QMS. The Ministry of Fisheries has established procedures to monitor and enforce the QMS based on a system that tracks the flow of fish and fish products from the catcher to the purchaser and then to reconcile these catches with quota holdings. Fishing permit holders are required to provide detailed catch reports, along with additional information on effort. Permit holders are required to complete a report at the end of each fishing trip to record catch details (including vessel, location, species and quantities), which quota the catches are to be counted against and to whom the fish is sold. Commercial fishers are restricted to selling fish to licensed wholesalers and processors. Licensed receivers are also required to provide monthly reports. These sources of information enable the Ministry to monitor catches against quota holdings and audit records.

During each fishing year, catches by quota holders are progressively counted against their quota holdings. Comprehensive and strict reporting procedures are in place. Detailed reporting of catches at sea by permit holders and transfers onshore to licensed fish receivers ensure a robust documentation of catches and their distribution. Compliance with these reporting regimes is substantially based on auditing of these paper trails; although a range of other surveillance procedures are also used. Penalties for non-compliance or avoidance are severe, including forfeiture of quota and property upon conviction, and exclusion from the fishing industry. Test cases in the New Zealand courts have upheld the fisheries legislation, and for the most part, compliance levels are high.

Government was committed to resource rentals when the QMS was introduced. From the outset, government made it clear that it intended to increase resource rentals until the value of annual traded quota approached zero. Payment was based on ITQ holdings, regardless of whether fish were harvested. The rental varied across species and was not paid on quota held by government. At the time, the Minister had the right to vary - up to 20% increase - resource rentals each year. In setting the rental the Minister was required to have regard to the value of quota, the impact on net commercial returns, and relevant changes to the TACO. Resource rentals were to be paid into the Fisheries Fund, which was to be used to finance management and research activities. The fund was never established, and rentals were paid into government's consolidated fund. Resource rentals were one of the most contentious elements of government's fisheries policy. Industry vigorously opposed resource rentals. Even if tradable rights create an economic surplus in the fishery, the problem of determining government's share of the surplus was not straightforward. Each year significant resources were allocated -- by industry and government -- to present convincing arguments for, and against, changes to resource rentals. Resource rentals contributed to commercial uncertainty in the fishery.

Cost recovery was introduced in 1994, after the switch to proportional ITQ and removal of resource rentals. Cost recovery is based on the notion of avoidable cost and applies only to the commercial fishery. The government levy includes an ITQ levy and a conservation services levy. The levy does not apply to all quotas. The government pays the costs associated with non-commercial fishing and any joint costs shared by these two broad groups. Revenue from cost recovery is used to pay for fisheries management, research and compliance activities of the Ministry of Fisheries.

3. ECONOMIC ANALYSIS

Rock lobster were introduced into the QMS in 1990. The New Zealand rock lobster industry faces harvest limits, receives no subsidies from government and exports more than 90 percent of the harvest. Firms operating in this environment must look to technologies that economise on scarce harvesting rights, value-adding processes, formation of industry associations, and stock enhancement, to increase profit. Table 1 shows the TACC (aggregated over all QMAs) falling over the period 1991 through 2001. The percentage of the TACC caught has increased from 85% to 98%, as has the catch per unit effort (CPUE).

Table 1: Commercial catch summary 1992-2001

|Year |TACC |Catch |% Caught |CPUE |

|1991/92 |3,616 |3,066 |85 |0.47 |

|1992/93 |3,265 |2,644 |82 |0.42 |

|1993/94 |2,913 |2,755 |95 |0.39 |

|1994/95 |2,913 |2,622 |90 |0.45 |

|1995/96 |2,913 |2,536 |87 |0.58 |

|1996/97 |2,954 |2,645 |90 |0.70 |

|1997/98 |2,865 |2,553 |89 |0.79 |

|1998/09 |2,927 |2,718 |93 |0.88 |

|1999/00 |2,849 |2,748 |96 |na |

|2000/01 |2,849 |2,799 |98 |na |

Source: Clement and Associates (2001), Ministry of Fisheries

The volume and the value of rock lobster exports are shown in Table 2. Using 1986 (when the QMS was introduced) as a benchmark, total seafood exports for year ended 2000 had increased by 176% in volume and by 217% in nominal value. In contrast rock lobster volumes declined as TACC reductions took hold, but the real value of the rock lobster catch has increased. Over the period of the analysis monetary inflation has been low (0-2% p.a) and the exchange rate environment favourable to exporters. Growth in the volume and value of rock lobster exports is shown in Table 2. In 2000 rock lobster ranks third in export earnings ($129 m), behind Hoki ($311 m) and mussels ($169 m). Japan is New Zealand's largest seafood export market ($318 m), with USA ($258 m) and European Union ($219 m) second and third respectively (New Zealand Seafood Industry, 2001).

Table 2: Exports 1986 and 1999-2000

| |1986 a |1999 |2000 |

|Commodity |Tonnes |$ m |Tonnes |$ m |Tonnes |$m |

| |(000) |(fob) |(000) |(fob) |(000) |(fob) |

|Rock lobster |3.1 |104.2 |3.1 |114.5 |2.8 |129.0 |

|Total seafood exports |158.1 |657.3 |328.4 |1,179.2 |279.2 |1,430.9 |

Source: Statistics New Zealand, New Zealand Seafood Industry (2001)

Data obtained from the annual enterprise survey of rock lobster firms are summarised in Table 3. The data have are expressed in $1992. Average labour input has declined in recent years, the value of total assets per labour equivalent has increased and non-labour expenditure per labour equivalent has increased. These results should be considered alongside the TACC for the rock lobster industry, which, if anything has declined over the same period.

Table 3: Descriptive statistics for rock lobster

|Year |Av. Net Rev. |TFTE |Total assets ($000) per |Total expenditure |

| |($000) | |FTE |($000) per FTE |

|1992 |117.4 |2.7 |91.8 |52.7 |

|1993 |104.4 |2.7 |97.2 |57.0 |

|1994 |41.3 |2.7 |114.1 |69.9 |

|1995 |124.4 |3.9 |139.2 |67.9 |

|1996 |113.4 |3.2 |133.2 |75.3 |

|1997 |95.8 |2.9 |137.5 |78.9 |

|1998 |100.0 |2.0 |236.2 |85.1 |

|1999 |117.9 |1.6 |219.0 |77.9 |

|2000 |200.5 |1.8 |284.9 |101.4 |

Source: Annual Enterprise Survey, Statistics New Zealand

TFTE =Total Fulltime Equivalents

FTE = Full time Equivalent

Av. Net Rev = Average Net Revenue

Panel Data Models

It is of interest to examine panel data for evidence of a functional relationship between sales (output) and labour, non-labour expenditures capital and the TACC. The formulation in terms of a general production function is h* is

[pic]

where[pic] and vi is unrestricted (Greene, l993).

The analysis is based on panel data obtained from the Annual Enterprise Survey (Department of Statistics, New Zealand). The data is an unbalanced panel drawn from rock lobster firms over 9 years, from 1992 through 2000. The data were deflated to 1992 values. If the ui's are treated as firm-specific constants the model may be estimated by OLS as a "fixed effects" model. The fixed effects model removes the assumption that firm inefficiencies are uncorrelated with input levels. Hausman and Taylor (1981) provide conditions for identifying fixed effects. If the assumption of independence of the inefficiencies vi's and input levels can be maintained then Green (1993) suggests that a random effects model may be appropriate. Estimation then proceeds with generalised least squares. The advantage of the random effects model is that it allows time-invariant firm-specific attributes - such as the size of the firm's capital stock that is not growing - to enter the model.

Table 4 contains estimates for both a fixed effects model (using OLS) and a random effects model (using GLS). The panel included 9 years of data obtained from a sample of rock lobster firms. Annual TACC levels, as summarised in Table 1, were incorporated into the data set. The results show the significance of the TACC, labour, firm assets and non-labour inputs into the production process. The LM statistic is not large and suggests that there is considerable homogeneity across rock lobster fishing firms. This seems reasonable given the characteristics of rock lobster fishing. The Hausman statistic bears on the question of which estimator, random or fixed effects, is to be preferred. The Hausman statistic is larger than the critical value [pic]which weighs in favour of the fixed effects approach.

Table 4 : Estimates of panel data models

| |Dependent variable: real value of sales |

| |Number of observations: 1075 |

|Variable |Fixed Effects |Random Effects |

|Labour |34.27 |31.14 |

| |(19.36)* |(19.2)* |

|Non-labour costs |1.55 |1.56 |

| |(0.01)* * |(0.01)* |

|Real value of assets |0.06 |0.06 |

| |(0.01)** |(0.01)** |

|TACC |158172038 |216.59 |

| |(130897040)** |(106.90)* |

|Constant | |-542853.7 |

| | |(314315.2)* |

|Hausman test | |130.03 |

|LM test | |3.94 |

|R |0.92 |0.92 |

Evidence from quota markets

We have argued that information generated through trades in quota markets can also provide useful information (Batstone and Sharp, forthcoming). Table 5 summarises quota and (annual) lease prices over the period 1991 through 1999 for CRA2, one of the rock lobster QMAs. The ratio of lease to asset price provides an indication of the return quota ownership. The annual average ratio of lease price to quota price has been trending down since 1991.

Table 5: Annual prices in CRA2 quota market 1991 through 1999

|Year |TACC |Quota price |Lease price |Lease price to |

| | | | |quota price ratio |

|1991/92 |3,616 |53,016 |8,022 |0.15 |

|1992/93 |3,265 |93,574 |9,911 |0.11 |

|1993/94 |2,913 |109,764 |11,105 |0.10 |

|1994/95 |2,913 |180,258 |13,408 |0.07 |

|1995/96 |2,913 |239,851 |17,022 |0.07 |

|1996/97 |2,954 |243,275 |12,901 |0.05 |

|1997/98 |2,865 |229,286 |17,254 |0.08 |

|1998/99 |2,927 |217,222 |18,020 |0.08 |

Figure 1 illustrates the relationship between CPUE and lease price. The positive association is to be expected because increasing catch per unit effort should be reflected in annual profit. Figure 2 shows in greater detail the relationship between asset price and lease price. Finally, Figure 3 shows the relationship between the ratio of lease to asset price (the implicit discount rate) and interest rates. It would appear that the implicit rate has been trending down toward the market interest. A simple linear regression based on these data finds a significant (1% level) negative relationship between the ratio of lease price to asset price and time over the period.

[Figure 1]

Figure 1: Relationship between lease price and annual catch per unit effort

[Figure 2]

Figure 2: Times series of asset price and lease prices

[Figure 3]

Figure 3: Times series of implicit discount rate and interest rate

We can describe the determinants of asset prices in greater detail using the following model

A=f (P,C,TACC)

where A = asset price, P= landed price of rock lobster, C = costs, and TACC = the allowable harvest. We can't observe P and C but we can infer profit from lease trades. Thus the regressions shown in Table 6 are based on a relationship between asset price as the dependent variable and lease price, TACC, interest rate, and the export price index (FOB) as independent variables.

Table 6: Regression results for CRA2

| |Dependent variable: Quota price |

| |Number of observations: 55 |

|Independent variables |Model 1 |Model 2 |

| | |(logs) |

|Constant |333988.00 |23.58 |

| |(124033)** |(6.02)** |

|Lease price |13.88 |1.11 |

| |(1.37)** |(0.12)** |

|TACC |-1503.00 |-3.84 |

| |(579.92)** |(1.06)** |

|FOB |-1294.24 |-0.43 |

| |(922.47) |(0.30) |

|Interest rate |3991.91 |0.01 |

| |(5317.03) |(0.25) |

|R |0.76 |0.79 |

|D-W Statistic |1.55 |1.74 |

|F-Statistic |40.79 |48.08 |

These results confirm that annual lease prices are related to asset prices. Of interest is the significance level of the coefficient attached to the TACC. This result is also encouraging because it conforms to the underlying theory of demand.

4. DISCUSSION AND CONCLUSION

Tradable rights, a relatively competitive industry structure, and a largely deregulated economy, provide the necessary incentives for efficient and sustainable development of the fishery. The QMS has provided a basis upon which the rock lobster fishing industry has evolved into a dynamic and profitable sector that makes a significant contribution to seafood exports. Moreover, this outcome has been achieved without subsidy, with harvest controls and cost recovery for management, research and compliance, and within competitive export markets. This is a remarkable achievement relative to the state of the fishery prior to the implementation of the QMS (Sharp, 1997).

The structural features of the QMS have proved to be quite robust and amenable to performance enhancing changes to harvesting rights. The two structural pillars of the system have endured for 15 years. Tradable rights have unleashed a dynamic that is reflected in the summary statistics presented above. Over the period 1992-2000 rock lobster fishers have slightly reduced labour, increased non-labour expenditures, and enhanced the value of their capital assets. The TACC has been reduced over the period and the percentage of the TACC caught has increased. Indications are that the catch per unit effort has increased.

Econometric modelling, using two data sets, supports the general observations. Two panel data models point to the significance of labour, non-labour expenditures capital and the TACC is determining sales. If we use quota market data we find a relationship between asset price as the dependent variable, and annual lease price, TACC, interest rates and the export price index. These results, although preliminary at this stage, are encouraging. Both panel data models show the significance of natural capital (implicit in the TACC) and manufactured capital. Both variables play a role in determining output. Summary statistics indicate an increase in the average level of manufactured capital over time as the supply of natural capital available to the industry was reduced. Second, the role of the TACC in the two panel data models and the time series model is significant. Elsewhere (Batstone and Sharp, forthcoming) we shown how times series modelling can provide some guidance on adjusting the TACC and assessing the benefits and costs of biological research.

We are planning to estimate stochastic frontier models using the panel data set. This should provide further insights into efficiency within the rock lobster fishery. It will also be of interest to compare efficiencies across sectors within the fishing industry.

References

Annual Enterprise Survey, Statistics New Zealand, Wellington.

Arnason, R. 1990. Minimum Information Management in Fisheries. Canadian Journal of Economics 23: 630-653.

Batstone, C.J. and B.M.H. Sharp, 1999. New Zealand’s Quota Management System: The First Ten Years. Marine Policy 23(2):177-190.

Batstone, C.J. and B.M.H. Sharp (forthcoming). Minimum Information management Systems and ITQ Fisheries Management Journal of Environmental Economics and Management.

Clement and Associates. 2001. New Zealand Commercial Fisheries: The Atlas of Area Codes and TACCs, 2001/2002, Clement and Associates, Tauranga.

Fried, H.O, C.A. Lovell and S.S. Schmidt. 1993. The Measurement of Productive Efficiency: Techniques and Applications, New York, Oxford University Press.

Fuss, M., D. McFadden, and Y. Mundlak. 1978. A Survey of Functional Forms in the Economic Analysis of Production, in Fuss, M. and D. McFadden, Production Economics: A Dual Approach to Theory and Applications, vol. 1, North Holland.

Greene, W.H. 1993. The Econometric Approach to Efficiency Analysis, in Fried, H.O, C.A. Lovell and S.S. Schmidt (eds), The Measurement of Productive Efficiency: Techniques and Applications, New York, Oxford University Press.

Greene, W.H. 1995.LIMDEP Version 7.0, New York, Econometric Software, Inc.

Greene, W.H. 2000. Econometric Analysis, 4th Edition, Prentice Hall.

Hausman, J. and W. Taylor. 1981. Panel data and unobservable individual effects, Econometrica, 49: 1377-1398.

Ministry of Agriculture and Fisheries. 1992. Fisheries Task Force, Sustainable Fisheries/Tiakina nga Taonga a Tangaroa, Report of the Fisheries Task Force to the Minister of Fisheries on the Review of Fisheries Legislation, Ministry of Agriculture and Fisheries, Wellington.

New Zealand Seafood Industry. 2001. New Zealand’s Seafood Business. .

Sharp, B.M.H. 1997. From Regulated Access to Transferable Harvesting Rights: Lessons From New Zealand. Marine Policy 21(6):501-517.

Sutinen, J. G. 1996. Recreational Entitlements: Integrating Recreational Fisheries into New Zealand’s Quota Management System. A report prepared for the Minister of Fisheries, Government of New Zealand: Wellington.

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